New York Central Railroad stock certificate, dated April 2, 1932. The certificate bears the image of“ Commodore” Cornelius Vanderbilt, who won control of the railroad in 1867 via cutthroat competition and behind-the-scenes share purchases.
Collection of the Museum of American Finance
1980s“ deal decade” included leveraged buyouts by private equity firms, strategic acquisitions by corporations taking advantage of lax antitrust enforcement and expansion into the US market by international companies. But it was the hostile takeovers— though they made up only a small percentage of the decade’ s deals— that defined Wall Street in the’ 80s.
That the public was so taken by battles between such unsympathetic figures says something about the high stakes and drama of hostile takeovers of that decade. A few people may have looked on with disgust as vulture raiders pecked at fat cat CEOs, but for everyone else, these clashes at the top of our largest companies were Hollywood material.
Thirty years earlier, nobody really knew what to make of fledgling corporate raiders picking fights with company CEOs. By the 1980s, such men were known as“ masters of the universe.” In many ways, the corporate raiders of the’ 80s were not so different from the’ 50s Proxyteers. Both groups featured aggressive and motivated young businessmen operating on the fringes of Wall Street. But while the Proxyteers struck fear into the hearts of CEOs with their ability to harness the discontent of public shareholders, the corporate raiders had something much more powerful at their disposal: ready cash. It came from Michael Milken and the vast market he created for new-issue junk bonds. Milken used his network of high-yield buyers to create a liquidity boom for young takeover artists.
GM’ s Evolving Ownership Structure
General Motors is a good example of how ownership of America’ s corporations evolved over time. In 1920, most of GM’ s shares were held by a handful of“ ownercapitalists,” as Peter Drucker called them. This group included the DuPont Company and men, like Alfred Sloan, who sold their businesses to Billy Durant in exchange for stock. Over the next 30 years, most of the large individual owners retired from GM’ s board of directors and passed away. In 1957, the US government forced DuPont to dispose of its large stake in General Motors for antitrust reasons. By the 1960s, General Motors was a modern public company, run by professional managers and governed by a board of directors with little share ownership. From that point forward, institutions would dominate the company’ s shareholder base.
General Motors itself played a major role in this evolution. Employee pension funds, which form one of the largest groups of institutional investors, are essentially a GM creation. While some pension funds existed when GM President Charles Wilson launched the GM Pension Fund in 1950, they tended to be annuity plans holding fixed-income securities, or trusts invested entirely in the stock of the employer company. Wilson believed pension plans should have significant equity exposure, but he thought it was senselessly risky to bet workers’ retirement money on the future of their employer.
He mandated independent management of GM’ s pension funds, little or no investment in the employer company and a diversified portfolio with no large ownership stakes in other companies. Wilson’ s guidelines immediately caught on with other employers— 8,000 new plans were launched within a year of GM’ s— and were codified in the ERISA Act of 1974.
Corporate America’ s decision to broadly invest its employees’ retirement funds in equities gave American workers a huge ownership stake in the country’ s economic assets. Drucker argued that this made the United States the world’ s first truly socialist country. But it also placed control of these investments in the hands of conservative, highly-regulated fiduciaries who limited their exposure to any single investment. Before Ross Perot pushed them to a breaking point, these kinds of investors were highly unlikely to intervene in the oversight of powerful companies like General Motors.
Ross Perot Sparks a Rebellion
On October 23, 1985, Perot penned a scathing five-page letter to Roger Smith, challenging his autocratic management style. He wrote:
In the interest of GM, you are going to have to stop treating me as a problem and accept me as—
— A large stockholder— An active board member
22 FINANCIAL HISTORY | Spring 2016 | www. MoAF. org